Apple’s China Trouble Makes Trump’s Trade War Harder to Defend

Date: Thursday, January 3, 2019Source: Bloomberg

Cook says Apple didn’t expect weakness in China, EM demand

U.S. officials are going to Beijing next week for trade talks

President Donald Trump’s administration argues that the long-term gain from a trade war with China justifies short-term pain for consumers and investors. That case may be harder to defend now that the collateral damage includes one of America’s most recognizable brands.

Apple Inc. on Wednesday lowered its outlook for first-quarter revenue after a larger-than-expected slowdown in demand from China and fewer upgrades to models of the iPhone. In a letter to investors, Chief Executive Officer Tim Cook said the company didn’t expect growth in emerging markets to slow so sharply, especially in China.

It’s the latest evidence of how tensions between the world’s two biggest economies are backfiring on the U.S., undercutting Trump’s assurances that America could continue to grow quickly despite the conflict. At the same time, Chinese growth is decelerating more rapidly than many observers expected, leaving few winners on either side.

"China’s economy is seeing a much sharper slowdown than public data are reporting, which suggests there is much more pressure on Beijing to come to a trade truce than is popularly understood,” said Leland Miller, CEO of China Beige Book, a data analytics firm that surveys thousands of companies across the Chinese economy. “On the other hand, the falling U.S. stock market seems to be playing a similar role for President Trump.”

Data this week showed a worsening picture for China’s manufacturing sector. The IHS Markit gauge signaled a contraction for the first time since mid-2017, confirming a trend in the official index on Monday that showed the weakest reading since early 2016.

In a report last month, retail sales posted the worst performance since May 2003, rising 8.1 percent in November from a year earlier.

The timing of Apple’s announcement could appear to chip away at U.S.’s political leverage just days before trade talks resume with China. Mid-level officials from Washington are scheduled to travel to Beijing early next week for meetings aimed at averting an escalation on the dispute by March 1, when U.S. tariffs on Chinese imports are set to rise if an agreement isn’t reached.

Last year, Trump said “trade wars are good, and easy to win.” Commerce Secretary Wilbur Ross has likened the conflict with China to the “painful” start of a diet that eventually yields “happy” results.

Trump on Thursday tried to downplay the trade war’s effect on the broader economy. When his trade deals are sorted out, there will be a rebound after “a little glitch in the stock market last month.” He was referring to an 8.7 percent drop in the Dow Jones Industrial Average, the worst monthly performance since February 2009.

With less than two months left before the trade truce expires and tariffs on $200 billion worth of Chinese goods are set to hike to 25 percent, there are major outstanding issues that may be difficult to resolve in the short time frame the two countries have set for themselves.

U.S. Trade Representative Robert Lighthizer said last month that Trump was determined and not afraid of using “a strategy of tariffs, and taking hard lines” but at the same time wanted his advisers to reach a deal with China.

“If that can be done, the president wants us to do it. If not, we’ll have tariffs,” Lighthizer told CBS’s Face the Nation on Dec. 9.

The market selloff and signs of economic weakness may force the U.S. and China to reach a deal sooner than expected, said Mohamed El-Erian, chief economic adviser at Allianz SE and a Bloomberg Opinion columnist.

“It actually helps the process along,” he said. “I’ve argued all along that this will not end up being a global war -- this is going to be resolved.”

With its economic size and relatively low reliance on trade, the U.S. has the advantage in any trade war, El-Erian said. Once they realize America is willing to suffer economic pain to win the conflict, other countries will be under pressure to offer concessions, he said. Damage to major U.S. companies such as Apple may hasten the process.

“Apple is in a particularly dangerous position if the U.S.-China trade war escalates: it gets hit first on any U.S. tariffs, it then gets hit again on any China tariff response,” Miller said.

Apple’s worries aren’t confined to the economy. Cook also cited factors including supply constraints to newer models of the Apple Watch, iPad Pro and AirPods. Analysts said home-grown Chinese brands are taking market share from foreign rivals and noted a reluctance among consumers to upgrade ahead of an expected wave of new 5G technology.

"I’d suspect this is more to do with industry-specific issues than it being a sign of a major weakening in global GDP growth," said David Mann, global chief economist at Standard Chartered Plc in Singapore.

Cook is just the latest top executive to cite U.S. policies for his company’s weaker-than-expected performance.

U.S. tariffs, China’s “mercantilism” and the U.K.’s negotiations to leave the European Union are all weighing on trade and economic growth, FedEx’s Smith said in a conference call Dec. 18. That prompted FedEx to slash its profit forecast for fiscal 2019, implement an employee buyout and cut international delivery capacity.

“Most of the issues that we’re dealing with today are induced by bad political choices,” said Smith, a longtime Republican supporter who on earnings calls rarely misses an opportunity to champion free trade.